Article excerpt

Non-U.S. central banks can't seem to quench their thirst for short-term U.S. Treasury securities. Even after two years of escalated interest, they continue to swallow up repurchase agreements and other money market instruments at a surprising rate.

Why all the hullabaloo? Top government debt watchers aren't sure. Because the "why" is a mystery, analysts have mixed ideas as to whether this purchase pattern will continue.

What debt watchers do know is non-U.S. official holdings of money market instruments have climbed over 60% in the last couple years as ownership of Treasury notes and bonds has been essentially static.

According to R.H. Wrightson and Associates Inc. in New York, non-U.S. central bank holdings of money market instruments have been growing at a rate of 20% a year since late 1990. As of June 30, central banks offshore owned nearly $120 billion of U.S. Treasury bills, or 22% of all bills held outside the Federal Reserve. This compares to just $79 billion, or 18% of the total at the beginning of 1991.

Although government and Fed data do not include a full breakdown of instruments, market participants report that non-U.S. central banks are increasingly active investors in repurchase agreements.

Moving markets

Ideas are mixed as to whether it makes any difference who actually owns any given spectrum of the U.S. government debt supply. One credit market contact argues the more "serious" or "official" the investor is, the less likely he or she is to "churn" the market. Thus, one might expect a non-U.S. central bank to hold the security longer and not dump it back on the market so quickly, which would thereby keep the market in stronger hands.

Some market observers worry the combination of the Clinton Administration's shift to short-term debt and the continued thirst for short-end U.S. yield curve instruments by non-U.S. investors will make the U.S. financial system increasingly vulnerable to policy shifts by the Fed.

Reason: The Fed can directly influence the interest rates on instruments under two years in maturity. If the Fed were to suddenly raise or lower interest rates, a liquidation of short-term Treasuries holdings might ensue.

"By loaning cash and holding U.S. Treasuries as collateral, non-U.S. institutions are helping to keep short-term U.S. interest rates about one basis point lower than they would otherwise be," suggests Michael Cloherty, an analyst with R.H. Wrightson. "I see no reason why central bankers or other non-U.S. holders would move out (of short-term U.S. Treasuries)" in the period ahead. …

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